JULY 20, 2020

By S Murugappan, Advocate

THE authority for advance ruling at Goa sprang a surprise on Springfields (India) Distilleries when it sought for a ruling on the tax payable on hand sanitisers recently. Springfields sought classification of its alcohol-based sanitisers under chapter heading 3004 attracting a total tax of 12% (CGST 6% and SGST 6%). After getting a report from the departmental officer, the authority ruled that the product is classifiable under chapter heading 3808 attracting a total GST at 18%. - 2020-TIOL-173-AAR-GST.

In one line, without any elaboration, the authority stated that it is of the opinion that the alcohol based hand sanitisers manufactured by the applicant will fall under heading 3808. No reasoning or justification for favouring heading 3808 was disclosed in the ruling. One implied reason appears to be that heading 3808 attracts a higher tax rate.

The applicant also sought for the lower rate benefit on one more ground, namely, that the hand sanitisers are covered under The Essential Commodities Act 1955 and as such should be exempt from tax. The authority, of course, rejected such a contention; but as of now, from 1st July 2020, hand sanitisers are outside the scope of The Essential Commodities Act, 1955.

There are sanitisers and sanitisers. All sanitisers are not hand sanitisers. The covid- 19 pandemic has given birth to a booming industry for hand sanitisers. In countries where people rarely used these, young and old are forced to use these now to give them protection from disease. Are such sanitisers, drugs or medicaments? Or, are these 'disinfectants' as held by the authority for advance ruling ?

The lines of distinction between a hand sanitiser, a disinfectant and cosmetics, such as a soap, may be thin, but clearly discernible. A hand sanitiser which is also called a hand rub or hand antiseptic is applied to the hands for the purpose of removing or reducing common pathogens (disease causing organisms). They are considered as Over The Counter (OTC) drugs and typically they are in the form of foam, gel or liquid. When these are alcohol based, they are not considered as cosmetics.

In the present case, it is an admitted fact that the subject hand sanitisers are alcohol-based. It is also an admitted fact that the applicant is manufacturing these under a drug license dated 1st April 2020, issued by the Directorate of Food and Drugs Administration, Goa.

Hand sanitisers are considered as drugs and regulated by the FDA in the US. They need FDA registration, drug listing and NDC labeller code in the US. In India also, hand sanitisers are manufactured after obtaining licence under Drugs and Cosmetics Rules, 1945. After the outbreak of Corona pandemic, in March 2020, the Drugs Controller General of India (DCGI) has written to all State Drug Controllers to expedite licensing formalities to these units and also provide their details to him for exercising proper vigil and regulatory control over them. WHO has recommended use of alcohol-based hand sanitisers (Ethanol or Isopropyl alcohol) for protection from coronavirus. Therefore, in this background it is difficult to hold that these as not 'drugs' or 'medicaments' but as 'disinfectants'.

A 'disinfectant' is a product that is used on hard, inanimate surface or object to destroy bacteria, fungi etc. On the other hand, sanitisers are used to reduce, but not necessarily eliminate, microorganisms from inanimate environment to levels considered as safe. But hand sanitisers have limited application and are intended to be used on hands to remove disease-causing bacteria and virus.

Serial number 87 in schedule III to notification 1/2017-Central tax (Rate) dated 28th June 2017 covers 'disinfectants and similar products' falling under heading 3808 for which CGST is 9%. There are parallel State notifications levying SGST for these goods at 9% and thus the total tax is 18%.

Serial number 63 in schedule II to the above notification covers medicaments 'consisting of mixed or unmixed products for therapeutic or prophylactic uses put up in measured doses or in forms or packings for retail sale', with classification under heading 3004 and attracting CGST at 6%. With parallel State notifications for SGST, the total tax comes to 12%.

As per explanation (iv) to the above notification, the rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 including the Section Notes and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of the above notification.

Note 1(d) to chapter 38 of the first schedule to the Customs Tariff Act mentioned above clearly states that medicaments falling under chapter heading 3004 are excluded from coverage under chapter 38. Heading 3004 covers medicaments 'consisting of mixed or unmixed products for prophylactic' use. There cannot be any doubt that the hand sanitisers are preparations intended to remove or destroy viruses that may be present in the intact skin of the hands and thus prevent infection. As per Cambridge online dictionary 'prophylactic' means 'preventing disease' or 'something that is intended to prevent disease'. If anyone denies these attributes to hand sanitisers then that will be an insult to the use of this product itself, during these pandemic times. The one-liner ruling given by the authority fails to take cognizance of the above use as well as the guidelines for classification and more importantly, the applicability of Drugs and Cosmetics Act, 1940 to these products.

One more aspect to be kept in mind is that alcohol based hand sanitisers were subject to price controls in terms of the Drug (Prices Control) Order, 2013 read with Section 3 of The Essential Commodities Act referred to above.

When there was a hue and cry in the media on this ruling confirming 18% levy on hand sanitisers, the Ministry of Finance thought it fit to issue a clarification by way of a press release on 15th July 2020. It went one step ahead of the authority for advance ruling and where the authority failed to provide a reasoning for its ruling, the ministry supplied it stating that sanitisers are 'disinfectants' like soaps. All soaps are not in one basket. Soaps can fall under cosmetics or medicinal or Ayurvedic categories. A hand sanitiser which is manufactured under a drug license and intended for external application on hands and which claims to kill or remove 99% germs and viruses and offer protection from getting infected with a disease, is not a 'soap'.

The press release supplied one more justification for keeping the GST rates high on hand sanitisers. It explained that the inputs used in the manufacture of hand sanitisers such as chemicals, packing materials, input services etc. attract GST at 18% and, therefore, reducing the GST rate on sanitisers would lead to an inverted duty structure and will put the domestic manufacturers at a disadvantage. This is again nothing but a flawed and simplistic argument advanced to justify a higher rate of tax. Whatever is the tax burden, it ultimately ends up with the consumer and becomes a cost to him without any credit facility. On the other hand, even if there is an inverted duty structure (the press release is vague in this regard without precisely indicating how for all inputs and input services a flat rate of 18% tax is attracted), a manufacturer can claim refund of accumulated credit and there is no way he will incur any loss by passing on the benefit of lower tax to the customer. Rather, it will be the government that will be shelling out its revenue to the manufacturers by way of refund of accumulated credit. Alternatively, the manufacturers should be able to use the accumulated credit for setting off the tax liability in respect of other products manufactured by them.

The most surprising part is that when decisions given by the authority for advance ruling can be challenged before the appellate authority for advance ruling, the Ministry rushes in with its two cents to justify such decisions of the authority for advance ruling with press releases. This can constitute an attempt to influence the appellate authority for advance rulings and to pre-close the whole issue on all India basis when such rulings are, as per the statutory provisions themselves, applicable only to persons who seek such rulings.

For the time being, it appears that to clean your hands of germs and to protect you from corona infection, you should pay 18% tax and thus in the process watch nearly 1/5th of its cost evaporate with ethyl alcohol (ethanol) and the virus, as tax.

[The views expressed are strictly personal.]